9. Stock Based Compensation

Equity Compensation Plans

The 2013 Equity Compensation Plan (the “2013 Plan”) adopted by our Board of Directors in May 2013, became effective upon consummation of the IPO in August 2013. There are 4,408,369 common shares authorized for issuance under the 2013 Plan of which 289,741 were available as of September 30, 2014. Upon effectiveness of the 2013 Plan, stock options outstanding under the 2004 Equity Compensation Plan (the “2004 Plan”) to acquire 1,406,910 shares of our common stock were assumed under the 2013 Plan, leaving stock options to acquire 34,342 shares of our common stock outstanding under the 2004 Plan. There will be no further awards made under the 2004 Plan.

The 2013 Plan includes an “evergreen provision” that allows for an annual increase in the number of shares of common stock available for issuance under the 2013 Plan. The annual increase will be added on the first day of each fiscal year starting January 1, 2014, inclusive, and will be equal to five percent of the total number of shares of Common Stock outstanding on December 31st of the preceding calendar year as determined by the board of directors (the “Board”). The Board may act prior to the first day of any calendar year, to provide that there shall be no increase in the share reserve for such calendar year or that the increase in the share reserve for such calendar year shall be a lesser number of shares of Common Stock than would otherwise occur. On January 1, 2014 another 1,065,530 shares became available for grant under this evergreen provision, increasing the number of shares authorized for issuance under the 2013 Plan from 3,342,839 shares to a total of 4,408,369 shares.

Stock Options

We use the Black-Scholes option pricing model to determine the fair value of our stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option pricing model is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, risk-free interest rate, actual employee exercise behaviors and expected dividends.

The following table shows the weighted average assumptions used to value stock options on the date of grant, as follows:


	Nine Months Ended September 30,
	2014
	Employee			Non-Employees
Expected stock price volatility		55.17	%		62.71	%
Risk-free interest rate		1.33	%		0.10	%
Expected life of option (in years)		3.20			0.60
Estimated dividend yield		0.00	%		0.00	%
Weighted-average grant date fair value per share	$	2.22		$	2.06

There were no options granted during the nine months ended September 30, 2013.

Expected stock price volatility was calculated based on the weighted-average of historical information of similar public entities, for a period consistent with the expected life of the option. We will continue to use a weighted-average approach using other similar public entities’ volatility information until our historical volatility is relevant to measure expected volatility for future option grants. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption. The average expected life was determined based on anticipated exercise strategy and cancellation behavior for employees and non-employee directors. For the nine months ended September 30, 2014 a forfeiture rate of 1% and 0% was used for employees and nonemployee directors, respectively. We have not paid and do not anticipate paying cash dividends; therefore, the expected dividend rate was assumed to be 0%.

The following table summarizes our aggregate Equity Compensation Plan activity:


	Number of Options			Weighted Average Exercise Price		Weighted Average Contractual Term (in years)		Aggregate Intrinsic Value⁽¹⁾
Outstanding – December 31, 2013		3,272,837
Granted		1,292,011
Exercised		(12,161	)
Forfeited		(69,591	)
Expired		(3,889	)

Outstanding – September 30, 2014		4,483,207		$	5.41		7.73	$	(19,170,641	)

Exercisable – September 30, 2014		2,302,226		$	5.93		6.33	$	(11,046,080	)

(1)

Intrinsic value is the excess of the fair value of the underlying common shares as of September 30, 2014 over the weighted-average exercise price. A negative intrinsic value indicates the weighted-average exercise price is greater than the fair value of the underlying common shares as of September 30, 2014.

The total intrinsic value of options exercised during the nine months ended September 30, 2014 was $29,814.

Stock-Based Compensation Expense

Total stock-based compensation expense recognized based on the total grant date fair value of options vested and expected to vest was approximately $1,641,000 and $346,000 for the nine months ended September 30, 2014 and 2013, respectively. Due to the valuation allowance against our net deferred tax asset, we have never recognized a tax benefit for stock-based compensation.

All stock options issued to nonemployees (excluding non-employee directors) have been recorded at fair value. Options issued to these nonemployees in exchange for services have resulted in expenses of $0 and $24,000, during the nine months ended September 30, 2014 and 2013, respectively.

As of September 30, 2014, approximately $3.7 million of total unrecognized compensation cost related to unvested share options is expected to be recognized over a weighted-average period of 2.8 years.